Notes to Consolidated
Financial Statements
(Unaudited)
NOTE
1:
|
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature
of Business
SanSal
Wellness Holdings Inc. (the “Company”), was incorporated as Armeau Brands Inc. in the State of Nevada on March 15,
2011. On October 13, 2017, the Company filed Amended and Restated Articles of Incorporation with the Nevada Secretary of State
changing the name from “Armeau Brands Inc.” to “SanSal Wellness Holdings, Inc.” The Company’s business
objectives are to produce natural rich-hemp products, using strict natural protocols and materials yielding broad spectrum phytocannabinoid
rich hemp oils, distillates and isolates. The Company is licensed by the Colorado Department of Agriculture to grow industrial
hemp pursuant to Federal law on its farm.
Effective
September 27, 2017, the Company acquired 100% of the issued and outstanding limited liability company membership interests of
271 Lake Davis Holdings LLC dba SanSal Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split)
restricted shares of the Company’s common stock, which represented 100% of 271 Lake Davis’s total membership interests
outstanding immediately following the closing of the transaction. The transaction has been accounted for as a reverse merger,
whereby 271 Lake Davis is the accounting survivor and the historical financial statements presented are those of 271 Lake Davis.
Sansal,
LLC was a wholly owned subsidiary that was merged into 271 Lake Davis Holdings, LLC in January 2016.
Basis
of Presentation
The
accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation
S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information
and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.
In the opinion of the Company’s management, the accompanying unaudited financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2018,
and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March
31, 2018, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited
consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included
in the Form 10-K for the year ended December 31, 2017, filed with the SEC on April 23, 2018.
Principles
of Consolidation
The
accompanying consolidated financial statements reflect the accounts of Sansal Wellness Holdings, Inc. and 271 Lake Davis Holdings
and its wholly owned subsidiary, Sansal, LLC. All significant inter-company accounts and transactions have been eliminated in
consolidation.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could
differ from these estimates.
Fair
Value Measurement
The
Company has adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used
in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The
estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature
of these instruments. The carrying amounts of the Company’s short and long-term credit obligations approximate fair value
because the effective yields on these obligations, which include contractual interest rates taken together with other features
such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments
of similar credit risk.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may
be used to measure fair value:
Level
1 – quoted prices in active markets for identical assets or liabilities
Level
2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level
3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The
Company does not have any assets or liabilities measured at fair value on a recurring basis.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At times,
cash and cash equivalents may be in excess of FDIC insurance limits.
Revenue
Recognition
In
May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires
a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration
that the company expects to receive for those goods or services. The
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
Revenue
Recognition (Continued)
FASB
subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No.
2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from
Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively,
the new revenue standards).
The
new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method.
The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the
majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify
any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained
earnings was required upon adoption.
Under
the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in
an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues
following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations
in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Revenues
from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in
time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred
if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.
Inventories
Inventories
consist of growing and processed plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether
inventories are stated at lower of cost or net realizable value, management considers such factors as inventories in hand, estimated
time to sell such inventories and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion
of management, the value of specific inventory items has been impaired.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
Property,
Plant and Equipment
Purchase
of property, plant and equipment are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized.
Maintenance and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred.
When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or
loss is reported in the
Consolidated Statements of Operations
. Depreciation is provided over the estimated economic useful
lives of each class of assets and is computed using the straight-line method.
Impairment
of Long-Lived Assets
The
carrying value of long-lived assets are reviewed when facts and circumstances suggest that the assets may be impaired or that
the amortization period may need to be changed. The Company considers internal and external factors relating to each asset, including
cash flows, local market developments, industry trends and other publicly available information. If these factors and the projected
undiscounted cash flows of the Company over the remaining amortization period indicate that the asset will not be recoverable,
the carrying value will be adjusted to the fair market value. The Company has determined that no impairment exists at March 31,
2018 and 2017.
Compensation
and Benefits
The
Company records compensation and benefits expense for all cash and deferred compensation, benefits, and related taxes as earned
by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors who
perform similar services to those performed by the Company’s employees.
Stock-Based
Compensation
The
Company accounts for share-based payments in accordance with ASC 718, “Compensation - Stock Compensation,” which requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements
based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair
Value at Grant Date,” the Company estimates the fair value of the award using the Black-Scholes option pricing model for
valuation of the share- based payments. The Company believes this model provides the best estimate of fair value due to its ability
to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior
of option holders.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
Stock-Based
Compensation (Continued)
The
simplified method is used to determine compensation expense since historical option exercise experience is limited relative to
the number of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting
period.
The
Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments issued
to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value
of the equity instruments, and is recognized as expense over the service period.
Income
Taxes
The
Company was a Limited Liability Company (“LLC”) for income tax purposes until September 27, 2017 when the transaction
referred to in Note 1 discussed in the “Nature of Business” occurred. In lieu of corporate income taxes, the owners
were taxed on their proportionate shares of the Company’s taxable income. Accordingly, no liability for federal or state
income taxes and no provision for federal or state income taxes have been included in the financial statements up to that date.
The
Company accounts for income taxes under ASC 740 Income Taxes. Under the asset and liability method of ASC 740, deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is
more likely than not that the Company will not realize tax assets through future operations.
In
accordance with Financial Accounting Standards Board ASC Topic 740, Income Taxes, management evaluated the Company’s tax
positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements
to comply with the provisions of this guidance. The Company is subject to routine audits by taxing jurisdictions; however, there
are currently no audits for any tax periods in progress.
Effective
September 27, 2017 the Company became taxed as a C-Corporation. Income tax benefits are recognized for income tax positions taken
or expected to be taken in a tax return, only when it is determined that the income tax position will more-likely than-not be
sustained upon examination by taxing authorities. The Company has analyzed tax positions taken for filings with the Internal Revenue
Service and all tax jurisdictions where it operates. The Company believes that income tax filing positions will be sustained upon
examination and does not anticipate any adjustments that would result in a material adverse effect on the Company’s financial
condition, results of operations or cash flows. Accordingly, the Company has not recorded any reserves, or related accruals for
interest and penalties for uncertain income tax positions at March 31, 2017 and 2017.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
Related
Party Transactions
The
Company follows FASB ASC subtopic 850-10, Related Party Disclosures, for the identification of related parties and disclosure
of related party transactions. Pursuant to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for
which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value
Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts
for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management;
d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party
controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence
the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties
and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully
pursuing its own separate interests.
The
consolidated financial statements shall include disclosures of related party transactions, other than compensation arrangements,
expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which
no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the
dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any
change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties
as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
New
Accounting Pronouncements
In
July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. The amendments
in the ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory
at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course
of business less reasonably predictable costs of completion, disposal, and transportation. This ASU will be effective for the
Company for fiscal years beginning after December 15, 2016. The Company has adopted ASU 2015-11 and it did not have a material
effect on its financial statements.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|
New
Accounting Pronouncements (Continued)
In
November 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-17,
Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes.
This Accounting Standards Update simplifies the presentation of deferred income
taxes by eliminating the requirement for entities to separate deferred tax liabilities and assets into current and noncurrent
amounts in classified balance sheets. Instead, it requires deferred tax assets and liabilities be classified as noncurrent in
the balance sheet. Accounting Standards Update 2015-17 is effective for financial statements issued for annual periods beginning
after December 15, 2017. The Company early adopted this standard on a retrospective basis all deferred income tax assets and liabilities
have been presented as noncurrent.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The FASB issued ASU 2016-02 to increase transparency and
comparability among Companies by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition
and measurement of impacted leases. The new guidance is effective for fiscal years and interim periods within those years beginning
after December 15, 2018, with early adoption permitted. Management is currently evaluating the standard.
Subsequent
Events
The
Company has evaluated subsequent events through the date which the financial statements were available to be issued.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
2: INVENTORIES
Inventory
consists of:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Inventory
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
1,440,911
|
|
|
$
|
1,370,148
|
|
Finished Goods
|
|
|
30,515
|
|
|
|
44,802
|
|
Other
|
|
|
13,808
|
|
|
|
13,808
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,485,234
|
|
|
$
|
1,428,758
|
|
During
the periods ending March 31, 2018 and December 31, 2017, the Company realized a loss from destruction of plants in the amounts
of $0 and $202,920, respectively.
NOTE
3: PROPERTY AND EQUIPMENT
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
Life
|
|
|
2018
|
|
|
2017
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and Land Improvements
|
|
|
—
|
|
|
$
|
398,126
|
|
|
$
|
398,126
|
|
Building and Improvements
|
|
|
39
|
|
|
|
1,443,182
|
|
|
|
1,443,182
|
|
Greenhouse
|
|
|
39
|
|
|
|
693,987
|
|
|
|
693,987
|
|
Fencing and Irrigation
|
|
|
15
|
|
|
|
185,895
|
|
|
|
185,895
|
|
Machinery and Equipment
|
|
|
7
|
|
|
|
941,702
|
|
|
|
941,702
|
|
Furniture and Fixtures
|
|
|
7
|
|
|
|
216,116
|
|
|
|
216,116
|
|
Computer Equipment
|
|
|
5
|
|
|
|
20,053
|
|
|
|
20,053
|
|
Truck
|
|
|
5
|
|
|
|
16,161
|
|
|
|
16,161
|
|
Capital Lease Asset - not in service
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
$
|
3,915,222
|
|
|
$
|
3,915,222
|
|
Less Accumulated Depreciation
|
|
|
|
|
|
|
(369,300
|
)
|
|
|
(306,038
|
)
|
Property and Equipment
|
|
|
|
|
|
$
|
3,545,922
|
|
|
$
|
3,609,184
|
|
Total
depreciation expense was $63,292 and $58,180 for the three months ended March 31, 2018 and 2017, respectively.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
4: LONG-TERM DEBT
Long-term
debt consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Note Payable which requires monthly payments of $1,618 including interest at 6.00%
per annum until February 1, 2020 when the balance is due in full. The note is secured by specific assets of the
Company.
|
|
$
|
109,725
|
|
|
$
|
112,903
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Payable which requires monthly payments of $32,850 until
May 2018, when the Company may purchase the equipment for $1. The Company made no payments since August 2016 and is currently
in default with the lessor. (See Note 3)
|
|
|
538,254
|
|
|
|
538,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
647,979
|
|
|
|
651,157
|
|
Less Current Portion
|
|
|
(548,078
|
)
|
|
|
(551,191
|
)
|
Long-Term Debt - net of current
portion
|
|
$
|
99,901
|
|
|
$
|
99,966
|
|
Future
principal payments for the next 5 years are as follows for the years ended December 31:
|
|
|
|
|
2018
|
|
|
$
|
548,078
|
|
2019
|
|
|
|
13,735
|
|
2020
|
|
|
|
86,166
|
|
|
|
|
|
$
|
647,979
|
|
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
5: STOCK-BASED COMPENSATION
The
Company approved their 2017 Incentive Stock Plan on September 27, 2017 (the "Incentive Plan") which authorizes the Company
to grant or issue non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted
stock units and other equity awards up to a total of 7.5 million shares. Under the terms of the Incentive Plan, awards
may be granted to our employees, directors or consultants. Awards issued under the Incentive Plan vest as determined by the Board
of Directors or any of the Committees appointed under the Incentive Plan at the time of grant.
The
Company's outstanding stock options have a 10-year term. Outstanding non-qualified stock options granted to employees and
a consultant vested immediately. Outstanding incentive stock options issued to employees vest over a three-year period. The
incentive stock options granted vest based solely upon continued employment ("time-based"). The Company's time-based
share awards that vest in their entirety at the end of three-year periods, time-based share awards where 33.3% of
the award vests on each of the three anniversary dates.
Stock-based compensation expense was as follows:
|
|
Three Months Ended
March 31:
|
|
|
|
2018
|
|
|
2017
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
50,564
|
|
|
$
|
—
|
|
Incentive Stock Options - Time Bases
|
|
|
—
|
|
|
|
—
|
|
Total Stock-based
Copensation Expense
|
|
$
|
50,564
|
|
|
$
|
—
|
|
Stock
option activity was as follows in the periods ended March 31, 2018 and December 31, 2017:
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise
|
|
|
Weighted-
Average
Remaining
|
|
Outstanding at Decmber 31, 2017
|
|
|
533,336
|
|
|
$
|
0.50
|
|
|
10 Years
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
(25,000
|
)
|
|
$
|
0.50
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
508,336
|
|
|
$
|
0.50
|
|
|
9.5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2018
|
|
|
425,001
|
|
|
$
|
0.50
|
|
|
9.5 Years
|
|
Exercisable at March 31, 2018
|
|
|
425,001
|
|
|
$
|
0.50
|
|
|
9.5 Years
|
|
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
5: STOCK BASED COMPENSATION (CONTINUED)
The
Company estimated the fair value of each stock option on the date of grant using the Black Scholes valuation model with the following
assumptions:
Valuation Assumptions
|
|
Risk-free interest rate
|
2.14% – 2.31%
|
Expected dividend yield
|
0%
|
Expected stock price volatility
|
105%
|
Expected life of stock options (in years)
|
10
|
NOTE
6: OPERATING LEASES
On
January 15, 2017, the Company entered an agreement with Pueblo, CO Board of Water Works to lease water for the Company’s
cultivation process. The agreement went into effect as of November 1, 2016 with a term of 10 years expiring on October 31, 2026,
with an option to extend the lease upon expiration for 10 additional years. This agreement replaced previously entered agreements
with Pueblo, CO Board of Water Works. The lease requires annual non-refundable minimum service fees of $15,000 and a usage charge
of $1,063 per acre for 30 acres. The minimum service fees and usage charges are subject to escalators for each year based upon
percentage increases of Pueblo, CO Board of Water Works rates from the previous calendar year. Total water lease expense was $11,724
for the three months ended March 31, 2018 and 2017, respectively.
As
of March 31, 2018 and December 31, 2017, operating leases have no minimum rental commitments.
NOTE
7: COMMON STOCK
Effective
September 27, 2017, the Company acquired 100% of the issued and outstanding limited liability company membership interests of
271 Lake Davis Holdings LLC dba SanSal Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split)
restricted shares of the Company’s common stock.
On
November 9, 2017, Financial Industry Regulatory Authority authorized a 6-for-1 forward split of the Company’s issued and
outstanding shares of common stock in the form of a stock dividend. Accordingly, stockholders of the Company as of the record
date of November 9, 2017 received five additional shares of common stock for each share then held. All relevant information relating
to number of shares and per share information have been retrospectively adjusted to reflect the split for all periods presented.
In
January 2018, the Company issued 84,000 shares of common stock for proceeds of $42,000.
In
January 2018, the Company issued 50,000 shares of common stock for marketing services, valued at $20,500.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
7: COMMON STOCK (CONTINUED)
In
February 2018, the Company issued 120,000 shares of common stock for proceeds of $30,000.
In
March 2018, the Company issued 20,000 shares of common stock for proceeds of $10,000.
NOTE
8: INCOME TAX
The reconciliation of income tax computed at the Federal statutory
rate to the provision for income taxes from continuing operations is as follows:
|
|
Three Months Ended:
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(124,000
|
)
|
|
$
|
(144,000
|
)
|
Permanent differences
|
|
|
—
|
|
|
|
—
|
|
State and local taxes, net of Federal benefit
|
|
$
|
(16,000
|
)
|
|
$
|
(19,000
|
)
|
Change in valuation allowance
|
|
|
140,000
|
|
|
|
163,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Components of deferred tax assets are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
483,000
|
|
|
$
|
397,000
|
|
Total Deferred Tax Assets
|
|
|
483,000
|
|
|
|
397,000
|
|
Valuation Allowance
|
|
|
(253,000
|
)
|
|
|
(162,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
230,000
|
|
|
$
|
235,000
|
|
Deferred Tax Liabilities;
|
|
|
—
|
|
|
|
—
|
|
Depreciation and Amortization
|
|
|
230,000
|
|
|
|
235,000
|
|
Total Deferred Tax Liabilities
|
|
|
230,000
|
|
|
|
235,000
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has approximately $1,683,000 net operating loss carryforwards that are available to reduce future taxable income. Those
NOLs begin to expire in 2038. In assessing the realization of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred
tax assets for every period because it is more likely than not that all of the deferred tax assets will not be realized.
The
Company’s deferred tax liability associated with timing differences related to depreciation and amortization includes $202,000
of liability resulting from tax depreciation deducted in excess of GAAP depreciation prior to the Company becoming taxed as a
C-Corporation.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
8: INCOME TAX (CONTINUED)
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law, making significant
changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35%
to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system
to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has
estimated its provision for income taxes in accordance with the 2017 Tax Act and the guidance available as of the date of March
30, 2018, but has kept the full valuation allowance. As a result, the Company has recorded no income tax expense in the fourth
quarter of 2017, the period in which the 2017 Tax Act was enacted.
On
December 22, 2017, the Securities and Exchange Commission published Staff Accounting Bulletin No. 118 (“SAB 118”),
which addressed the application of GAAP in situations where the Company does not have the necessary information (including computations)
available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax
Act. The deferred tax expense to be recorded in connection with the remeasurement of deferred tax assets is to be a provisional
amount and a reasonable estimate at December 31, 2017, based upon the best information currently available. The ultimate result
may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in the
interpretations and assumptions that the Company has made, additional regulatory guidance that may be issued, and actions that
the Company may take as a result of the 2017 Tax Act. Any subsequent adjustment to these amounts will be recorded in current tax
expense in the quarter of 2018 when the analysis is complete. The accounting is expected to be
complete
when the Company’s 2017 federal corporate income tax return is filed in 2018.
The
Company files income tax returns in the U.S. federal jurisdiction, and the state of Colorado.
The
Company adopted the provisions of FASB ASC 740, A
ccounting for Uncertainty in Income Taxes
. Management evaluated the Company’s
tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements
to comply with the provisions of this guidance. The Company has no significant adjustments as a result of the implementation of
FASB ASC 740.
NOTE
9: CONCENTRATIONS
The
Company had three customers in the three months ending March 31, 2018 accounting for 57%, 20%, and 10% of total sales. For the
three months ending March 31, 2017, three customers accounted for 35%, 24%, and 15% of sales.
The
Company had three customers in the three months ended March 31, 2018 accounting for 35%, 24%, and 15% or accounts receivable.
For the three months ended March 31, 2017, one customer accounted for 79% of accounts receivable.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
10: GOING CONCERN
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses
from operations since its inception. As of and for the period ended March 31, 2018, the Company had an accumulated deficit of
$4,294,312, a net loss of $203,295, and a working capital deficit of $410,915. These factors, among others, raise substantial
doubt about the ability of the Company to continue as a going concern. Continuation as a going concern is dependent on the ability
to raise additional capital and financing, though there is no assurance of success.
The
Company is currently in the final stages of launching a new rebranded line of hemp oil and extract products as part of the Company’s
increased focus on sales and marketing. The rebranded product line, including new trade name and packaging, is being developed
to expand the company’s potential customer base. The newly branded products are expected to be available to consumers, retailers,
and distributors in the second quarter of 2018, and will include vegan capsules, tinctures, lotions, salves, and oral syringes
in various potency levels and flavors.
Currently,
the Company incorporates an aggressive marketing plan to compete in the Cannabinoid industry. To become market leaders in the
market, the Company will use three primary departments to market its products including: web-based marketing, traditional marketing,
and medical marketing departments.
NOTE
11: RELATED PARTY
The
Company incurred $39,200 and $0 of legal expenses during the three months ended March 31, 2018 and 2017, respectively for legal
services. As of March 31, 2018 and December 31, 2017, the Company had related party legal accruals for $132,420 and $93,220, respectively.
The
Company entered into various note payables with stockholders of the company between March 2017 and March 2018. The notes bear
interest between 2.00% and 3.00% per annum. Principal and interest are payable in one installment due July 31, 2018. The principal
balance due on these notes was $1,059,289 and $1,030,080 for the periods ending March 31, 2018 and December 31, 2017. Interest
accrued was $22,616 and $16,230 for the periods ending March 31, 2018 and December 31, 2017, respectively.
The
Company issued stock incentives to various directors and employees. Refer to Note 5 for additional details.